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Court Of Appeal Extends Compensation For Breach Of Fiduciary Duties

An important decision in the case of Interactive Technology Corp ltd v Jonathan Ferster [2018] EWCA CIV 1594 could have implications for liquidators seeking compensation against former directors.

Facts

The claim made by Interactive Technology Corp (ITC) was against Jonathan Ferster, a former director, for breach of fiduciary duty. The claim consisted of unauthorised remuneration payments to Mr Ferster in the amount of £120,000 per annum which he paid himself out of ITC. In the trial, Morgan J agreed that Mr Ferster was liable to compensate ITC and listed a further hearing to deal with the terms of the order and the amount of damages.

The Order made in December 2016 provided that ITC were able to recover compensation for “losses” resulting from the payment of unauthorised remuneration to the respondent. The Order itself stated “Judgment be entered for ITC for equitable compensation to be assessed”.

The Appeal

The solicitors for ITC wrote to the court asking for a new Order in altered terms which would provide that Mr Ferster was also liable for all payments made out of the assets of the company in connection with the payments.

Morgan J in his February Judgment declined to make a new Order. The appeal concerned the interpretation of assessment of equitable compensation made by Morgan J in his Order made in December 2016, and whether it included the recovery of compensation for money or assets disbursed without authority.

The Court of Appeal

Lord Justice David Richards in his judgment stated that “there is no sufficient basis in the context of the application heard by the judge for restricting the usual effect of the express terms by implying a restriction to compensation for loss”. The equitable compensation should comprise or include:

1. The equivalent amount of the “remuneration” that he received from ITC in excess of his entitlement

2. The sums paid by ITC to HM Revenue and Customs by way of PAYE and National Insurance contributions associated with the unauthorised payments

3. Payments of any losses suffered by ITC in respect of any costs restating its accounts and any interest and penalties raised by HM and Revenue and customs against ITC consequent on ITC restating its accounts.

Commentary

This is an important decision by the Court of Appeal as the usual remedy for a breach of fiduciary duty is normally limited to compensation for the direct loss to the company. This case appears to extend the scope of “loss” to allow a company to not only recover the payments made to the malfeasant director but also to compensate the company for costs and losses associated with the breach of duty. This is another Judgment falling fast on the heels of Burnden Holdings (UK) Limited v Fielding and appears to extend the liability of directors for their breach of duty in relation to the company.

Key Contact

Edward Judge